Buy or Lease? Business Models for Solar Energy

Firms in different industries are increasingly adopting solar energy. For example, most technology companies have made big investments in the sector, for example, Apple announced an $850 million deal for a service agreement for solar energy in 2015. Similarly, retailers like Walmart have stated ambitious goals aiming to be supplied by 100% renewable energy. When adopting solar energy, these firms have an important choice: whether to purchase the system (direct ownership) or opt for an agreement with a service provider that offers solar-as-a-service (third-party ownership). In the latter case, the adopting firm enters a leasing or a power purchase agreement with a service provider, without the need of a significant upfront investment. This decision is financially very important, and federal and state incentives are commonly part of the equation. In practice, firms can approach this decision using a variety of criteria. As an illustration, in the retail sector, Ikea opted for direct ownership, whereas Staples preferred the service model. Despite the relevance of this decision for firms, there is limited empirical research comparing the two models from an operational perspective.

In this research, I examine the connection between the ownership decision by adopting firms and the operational performance of solar energy systems (as measured by the system’s production yield). The analysis focused on systems adopted under the California Solar Initiative between 2008 and 2013 in the non-residential sector. In this setting, system performance was particularly relevant. Indeed, not only service providers had an incentive to ensure that the systems were working well due to the inherent importance of performance in service contracts (e.g., in power purchase agreements service providers get paid according to the output generated by the system), but also due to the performance-based incentives given to the system’s owner under the California Solar Initiative.

Accounting for different factors that influence adoption, the analysis showed that systems adopted under service business models performed 4% better than systems adopted under the traditional direct ownership model. Moreover, I show empirical evidence consistent with service providers doing a better job in terms of installations and system design, despite them using generally solar panels that are not of better quality than those used in systems directly owned by the adopting firm.

Overall, the article establishes an important connection between service business models and operational performance, providing evidence of a performance advantage under the service model. Although the evidence is in the context of non-residential solar energy systems receiving performance-based incentives in a specific state, service business models are being increasingly used not only in solar energy, but also for clean technologies more generally (“cleantech-as-a-service” business models). Moreover, incentives for adoption have been common not only in the United States, but also in many other countries. The evidence from this article invites stakeholders to carefully consider how the incentives behind each ownership model can make a difference from an operational perspective.  

Reference

Guajardo JA (2018) Third-party ownership business models and the operational performance of solar energy systems. Manufacturing Service Operations Management 20(4):788–800.

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